By Janet Kerr, Senior Manager in the PwC Total Tax Contribution team
How much does the UK financial services (FS) sector contribute to the public finances? There’s no straightforward answer to that question; no database will provide the total. FS companies bear and collect a total of 19 taxes in addition to corporation tax but there’s often little visibility over the total contribution from all taxes. However, PwC’s annual report for the City of London continues to shed light on the tax contribution made by the FS sector. The seventh and latest edition of the report is based on a survey of 45 of the largest financial services companies in the UK.
Published last week, the report estimates the FS sector’s Total Tax Contribution at £65.6bn (11.5% of total government receipts), comprising £24.8bn taxes borne and £40.8bn taxes collected. The total has increased compared to last year and is almost back to pre-recession levels.
Contribution through employment
What’s really striking about this study is the changing make-up of the tax contribution over the past seven years. Corporation tax now represents 8.2% (£5.4bn) of the total contribution, whereas employment taxes from the sector are estimated to be £30bn, 11.5% of total Government receipts from employment taxes. In recent budgets, the personal tax allowance has increased, reducing the amount of income tax paid by basic rate taxpayers. Despite this change, the average employment taxes per employee in the FS sector have increased by just over 4% in the last year. Well paid jobs in the FS sector are generating increasing employment tax revenues, in contrast to lower than expected employment tax receipts from the economy as a whole.
Irrecoverable VAT – a cost to the sector
While irrecoverable VAT is often a relatively small part of the Total Tax Contribution for companies outside the FS sector, it can’t be ignored when looking at the contribution of the FS sector to the public finances. Irrecoverable VAT is the cost incurred by a company when it cannot recover the VAT paid on its purchases. This is the case for a significant proportion of the cost base of many FS companies. Irrecoverable VAT has increased by 76% since the study began in 2007 and accounted for 26.9% of the taxes borne by companies in the 2014 study. It’s a significant and often little appreciated tax cost for financial services companies which is an increasing part of their total tax contribution.
Overall the study provides robust data to help answer the question ‘How much does the UK financial services sector contribute to the UK public finances?’ It is increasingly clear that confining the narrative to corporation tax ignores a large and growing part of the picture.